By KAREN JACOBS
RIVERSIDE, Calif. -- A visitor to Fleetwood Enterprises Inc. quickly senses this is no ordinary workplace.
Outside the recreational-vehicle and manufactured-housing maker's executive offices in this city 50 miles east of Los Angeles, there are no specially-marked parking spaces (though the chief executive does have a garage space that he can use). Inside, there are no marble floors or plush carpeting. The office of founder John Crean, who stepped down as chairman and CEO earlier this year but remains an adviser to the company, is small and unremarkable, with a couch, two desks and a bookcase.
It isn't just the simplicity of the company's appearance that is striking. The company is also strictly a no-perk zone: There are no executive dining rooms, no company cars or planes. Even when Chairman Glenn Kummer flies on company business, Fleetwood's travel department books him on a coach seat, unless he pays for an upgrade or gets one based on his frequent-flier mileage.
'Make Your Own Perks'
"You make your own perks by what you're willing to do with your income," says Dick Parks, senior vice president of Fleetwood's recreational-vehicle group.
That philosophy is reflected in the company's compensation system. All of Fleetwood's 600 managers receive relatively low base salaries. But they can increase their pay sharply through several incentive programs. Senior managers are eligible for both stock options awarded annually and long-term incentive bonuses awarded every two years, if the company has a cash-flow return on invested capital that meets or exceeds its cost of capital, currently 13.54%. Plant managers can earn stock options if their plants meet a similar target, and they are eligible for quarterly bonuses based on the plant's profitability. Even production workers can get bonuses, paid weekly based on their plant's productivity.
In a typical year, no manager receives more than about 50% of total compensation as base pay; for some jobs, base salaries can account for less than 10% of overall compensation. "The uniqueness of it is low base salary and high reward opportunity," says Mr. Kummer, 64 years old. He had total compensation of nearly $2.2 million in the fiscal year ended last April 27; $99,000, or just under 5% of that, represented his base salary. The top base salary in Fleetwood's executive suite that year, $111,000, was earned by Mr. Crean.
In recent years, of course, pay for performance has become a mantra for many companies. But few adhere to that mantra as faithfully as Fleetwood. "It's so different from the way businesses in general operate," says David Leach, head of the consulting practice at Compensation Resource Group Inc., a Pasadena, Calif., consultant.
Carol Bowie, research director of Executive Compensation Advisory Services in Springfield, Va., adds: "It's a very bold approach that puts their money where everybody else's mouth is in terms of putting the emphasis on performance-based pay."
But if tying compensation so closely to performance has the advantage of focusing management on the bottom line, it also has plenty of disadvantages that Fleetwood has had to cope with. There is, for instance, the challenge of attracting outside executives accustomed to large base salaries. There's also the possibility that focusing on cost-cutting targets will stifle creative ideas that may require the outlay of a lot of money.
"It does get somewhat tiresome as a director of marketing that you have got to go back and sell [a] program to each manufacturing center before you can design it or present it," says Elgin Bray, a director of marketing in the housing group.
Of course, Fleetwood isn't alone in its emphasis on incentive pay. For instance, Nucor Corp., a steelmaker in Charlotte, N.C., pays bonuses to its 22 senior officers based on the return on stockholders' equity. If the company reaches the maximum target of a 22% return, officers get a cash bonus equal to twice their salary, as well as the equivalent of their salary in stock.
In addition, production workers, who account for the bulk of Nucor's work force of 6,600, generally get about 60% of their annual income from performance bonuses based on meeting production quotas.
"Our base pay [for production workers] is $10 to $12 an hour," says J. Kenneth Iverson, Nucor chairman. "But with the production bonuses, it results in $25 an hour. That gives us very highly paid employees but very high productivity."
Still, if any company understands the risks and rewards of such a performance-based compensation system, it's Fleetwood, which has been paying its managers this way since Mr. Crean started the company in 1950.
Though Fleetwood's market share has declined to 26.6% of the domestic recreational-vehicle market from about 30% five years ago, the company, with nearly $3 billion a year in revenue, remains the dominant player in each of three RV categories: bus-like motor homes, towable travel trailers and smaller folding trailers. The company recently reported a 53% rise in profit for its third quarter ended Jan. 25.
Just about everybody in the company is eligible for a bonus, although for most production workers and support staff, the bonuses will generally not exceed 25% of overall compensation. About three years ago, Fleetwood quadrupled the number of managers eligible for stock options to about 120.
Empowered Workers
At a typical company, such a heavy emphasis on incentive pay might send many workers packing. But few of Fleetwood's managers complain. In fact, many of them say the low base salaries make them work harder to increase productivity. Fleetwood's managers tend to stay at the company for 20 years or more, and the company prefers to promote from within.
"We tend, because of the way we compensate, to get people who are entrepreneurial types," says Paul Bingham, chief financial officer. "Once people adjust to the relatively high incentive portion, they seem to like it."
Nick Castillo, a general manager in Fleetwood's housing division, says the heavy focus on variable pay gives him a feeling of empowerment that he never felt in management jobs elsewhere.
"This is the funnest job I've ever had because I get to have input from beginning to end," says Mr. Castillo, 42, who is responsible for product development, sales, marketing and customer service, and who oversees a staff of about 310 people.
Last year, Mr. Castillo pulled in earnings of $231,000, with only $48,000 of that as base pay. The rest came from bonuses based on the profitability at his facility.
"At most of the places where I've worked, bonuses ran 20% to 30% of base pay," he says. "Here, you aren't bound by such caps; there is no ceiling."
Still, the strong emphasis on incentive pay can have its drawbacks. Mr. Bray, the Fleetwood marketing director, says that because the low base salaries make hiring talent from outside the company difficult, he would like to see the ratio of base to incentive pay, which for his position is currently 30%-70%, be closer to 50%-50%.
"It's kind of a tough sell human resources has to overcome that they shouldn't have to," Mr. Bray says.
Dave Russell, a director of product development in the motor-home division, says prospective hires accustomed to higher base salaries seem uneasy about Fleetwood's compensation plan initially. "They ask a lot of questions, usually of the people who've been working here for a while," he says.
Fleetwood officials concede that in some cases, to attract outsiders to the company, they have made exceptions to the way they normally pay employees.
"Depending on the level at which we bring them in and how important their job is, we may have to guarantee a certain income to them for a while to give them time to adapt and understand our system," says Mr. Bingham, the finance chief. "It's a leap of faith to take the risk that two-thirds of your compensation or more is based on incentive."
Attracting outside talent isn't the only challenge inherent in putting so much weight on variable pay. Mr. Bray says keeping a keen eye on the bottom line can be detrimental from a creative standpoint. "For some people, it's probably better if they weren't so heavily tied to profits," he says. "One of the things you don't want to do with marketing people is to stifle the initiative and ideas. That does have a tendency to happen when you think about how much a marketing program is going to cost." He adds that rarely have any of his major marketing initiatives been killed because of their cost, however.
Planning Needed
Mr. Bray, 56, says low base salaries can also make managing personal finances burdensome. "A lot of people have told me that it's kind of difficult at first because you don't have a big monthly check coming in to pay those bills," he says. "So you have to take that bonus check and put it in the bank and understand how much of that is going to be used to pay bills every month."
Income swings are something to which any long-term Fleetwood employee is accustomed. Winter months aren't as profitable as summer months, when the company's products are in peak demand. The company is also very sensitive to economic downturns, since many of its products are luxuries. "You may have three, four or five years of growth and then there'll be one or two years of a down cycle, and your income suffers," Mr. Bray says. "So people who work here understand the need to save their money and put away some funds for some tough quarters."
But many of Fleetwood's managers seem willing to weather such income swings in search of the bigger payoff. Mr. Castillo, who has been employed with Fleetwood for nearly three years, says there's also a personal comfort level he feels at Fleetwood that he didn't have at other companies. "Any of us can go into [Mr. Kummer's] office at any time to discuss something," he says. Senior management doesn't appear separate from the organization but is a part of it, he adds.
"It builds trust," says Mr. Castillo. "And if the company does well, we all share in the rewards."
-- Ms. Jacobs is a copy editor for The Wall Street Journal in New York.